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Wednesday, Dec. 31, 2008

Foot-to-the-floor Toyota now suddenly has to downshift


Staff writer

Amid the worldwide economic downturn and the dollar's nosedive against the yen, Toyota Motor Corp. is facing a turning point in the aggressive overseas strategy that until now has powered its growth.

The global turmoil that some call the worst in almost a century has sent even Toyota, the most financially secure automaker in the world, to forecast its first operating loss in more than 60 years and has pushed the U.S. Big Three automakers — General Motors Corp., Chrysler LLC and Ford Motor Co. — to the verge of bankruptcy.

Experts say Toyota will be forced to rein in its aggressive global growth and limit overseas investment to cut down on production for a while. Toyota meanwhile will seek to boost the efficiency of its production system and once again focus on advancing technologies to gain a competitive edge.

"I have been worried that Toyota's recent growth strategy to push forward with plans to build one new plant after another in many regions will come to a dead end soon," said Yasuo Tsuchiya, a visiting professor at Meiji University who specializes in global management and industrial globalization.

"It was like combat troops entering a battlefield without enough supplies to advance," he said.

Until recently, Toyota has been well-known for its "kaizen" and "kanban" production system that maximizes efficiency. The auto giant took the time to make sure that workers at its overseas plants were well-versed in the firm's philosophy.

But it could not catch up with its recent rapid production expansion in the United Sates, China and Russia, Tsuchiya said, adding that continuing such strategies would eventually cause faults, including in car components.

Tatsuya Mizuno, an analyst at Fitch Ratings Ltd. in Tokyo, echoed this view.

"Toyota has changed the past cautious stance and aggressively invested abroad in the past several years," he said.

Toyota's excessive annual production increase of 500,000 to 600,000 units and its decision to start producing gas-guzzling full-size pickups in the U.S. in 2007 meant that it felt the impact of the U.S. financial turmoil much more than Honda Motor Co., which specializes in compact cars, Mizuno said.

Toyota shocked the world on Dec. 22 when it announced that it anticipates an operating loss of ¥150 billion for the business year to March — its first since comparable data became available for the year to March 1941 — due to shrinking global auto sales and the yen's continued appreciation. It marked a sharp turnaround from operating profit of ¥2.27 trillion posted a year earlier.

Toyota said it will postpone plans to increase production in the U.S., halve production at 16 lines around the world and suspend production at all domestic plants for a while in January.

"We have checked market conditions in every country and region, but we still cannot see the bottom of the downtrend," President Katsuaki Watanabe told a news conference in Nagoya.

Despite Toyota's uncertain global outlook, experts say the U.S. market will remain the largest profit source for Toyota and other Japanese automakers.

"The importance of the North American market has been relatively smaller than before, as the emerging markets have been bigger. But there is no market in the world with a size of more than 10 million units," said Fitch Ratings' Mizuno.

"The shrinkage of the U.S. market is unusual, so I don't expect the conditions to continue," he said.

The contraction of the global market may continue for two to three years, but Toyota as well as Honda and Nissan Motor Co. will increase their shares in the U.S. market in the long term, he said.

Tsuchiya of Meiji University said the recent financial crisis is a good opportunity for Toyota to review its excessively rapid expansion in overseas production, because continuing such a strategy can often result in component faults, which hurt a brand's image.

He pointed out three things Toyota should focus on: Create innovative technology for new types of cars or invent a new sales method; review its global marketing strategy to reinforce its organizing power and raise production efficiency of engines and other components; and slim down costs and raise cash.

Toyota has already launched a committee under the business board to trim production and other costs further to earn a profit for the short term.

"Japanese-style management is based on internal growth, meaning penetration of their production systems at new plants," he said. "It contrasts with management based on external growth using mergers and acquisitions."

Even before Toyota's balance sheet weakened, experts did not expect the auto giant to take over part of its U.S. rivals' business.

"Taking over those companies is the last thing that Toyota would do," said Kiichi Kageyama, a professor emeritus at Chiba University of Commerce and an expert on business management.

"It is impossible it will do something that causes criticism in the U.S.," Kageyama said.

Toyota experienced the trauma of being bashed during the U.S.-Japan trade friction in the 1980s triggered by rising sales in North America. Japanese automakers felt compelled to restrict their exports to the U.S.

Toyota started overseas production for the first time in 1984, when it set up a joint venture, New United Motor Manufacturing Inc., with GM in Fremont, Calif., using one of GM's idle plants.

Toyota's reason for the agreement was to soothe the tension caused by the trade friction between Japan and the U.S. at that time.

As a result of Japanese carmakers' increasing sales of fuel-efficient compacts in the U.S. market in 1980s, Japan's trade surplus with the U.S. swelled and pushed up the yen's strength against the dollar.

The 1984 joint venture was also the first time for Toyota to introduce in the U.S. its vaunted production system conducted by skilled workers based on a teamwork-based working style.

To hand down the production skills to local workers not only in the U.S. but in other regions, Toyota later built global production centers in the U.S., Britain and Thailand, where highly skilled Japanese workers train workers from abroad, Toyota officials said.

After gaining confidence about local production through its Fremont joint venture, Toyota accelerated building plants overseas. Before launching the joint venture, Toyota had built plants in developing countries, where demand was strong but the tariff on imported vehicles was high. In these countries, Japanese carmakers imported lower-tariff components from Japan and assembled them there.

But as demand in emerging markets rose and the countries reduced tariffs, Toyota gradually changed its plants into purely local production plants, including those in Southeast Asia, Africa and South America.

Amid the ongoing global market downturn, credit rating agency Fitch Ratings on Nov. 25 downgraded Toyota to AA from AAA, saying it faces a risk of a downturn because 50 percent of its profits come from the U.S. market, which is rapidly deteriorating, and its financial loan company faces a weak business environment.

Yet experts say Toyota will increase its competitiveness in the North American market.

"Japan's three major carmakers, especially Toyota, have an advantage of fuel-efficient cars and environment-friendly technologies," Fitch's Mizuno said. "So I expect them to grow shares and their status in the market in the long term."



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